Debt Maturity Portfolio Effect vs Income Effect
RCTReview
Lenders must distinguish whether the long-run benefits of a grace period stem from lower debt service present value (an income effect) or from enabling high-return illiquid asset purchases (a portfolio effect).
Picture this
Imagine receiving a small discount on your monthly rent versus being permitted to use your security deposit to buy a delivery van for your bakery. The rent discount saves a little cash, but the delivery van permanently doubles your daily sales volume.
What the evidence says
The net present value income effect accounts for only Rs 10,000 (roughly 42%) of the observed Rs 23,600 long-run capital stock differential between grace period and regular clients, proving that enabling illiquid investment choice (the portfolio effect) drives the majority of economic gains.
- Who was studied
- N = 845 microfinance borrowers in urban Kolkata, India (simulated via numerical cash-flow models calibrated to experimental data).
- How
- Counterfactual financial simulation comparing endline business capital differentials generated by net present value interest savings against asset return differentials over 36 months.
What to do
Structure microcredit terms specifically to facilitate high-return asset purchases rather than relying solely on interest rate cuts or fee waivers.
From the source
"Using a return to capital of r_L = 0.08, even if all returns are reinvested, the endline capital stock differential will be Rs 10,000, which is roughly half of the difference observed in the data... lead us to emphasize the portfolio effect."
101_290 microfinance and entrepreneurship AER2013.pdf